Coronavirus: Prepare to be hit but we’ll ease economic blow, says RBA

The Reserve Bank is bracing for a ‘very large economic contraction’ and the highest unemployment rate for ‘many years’.

Reserve Bank of Australia governor Philip Lowe. Picture: AAP

The Reserve Bank is bracing for a “very large economic contraction” and the highest unemployment rate for “many years” as the Bank for International Settlements warns of a double whammy global recession if measures to suppress the coronavirus fail.

Governor Philip Lowe, in his first public statements since launching a bond-buying program last month, said the economy faced “considerable uncertainty about the near-term outlook”, and appeared to endorse the government’s stimulus measures.

“The co-ordinated monetary and fiscal response, together with complementary measures taken by Australia’s banks, will soften the expected contraction and help ­ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed,” Dr Lowe said.

In March the federal government announced $214bn worth of new spending to help mitigate the impact of social-distancing measures, while the RBA announced a $90bn line of cheap credit to the nation’s banks.

Meanwhile the Bank for International Settlements said growth in the US and other advanced economies could slump as much as 11 per cent this year.

“Unfortunately, in the absence of a vaccine or a treatment, we cannot rule out the possibility that the virus will re-emerge after the confinements are unwound,” it said in modelling of the coronavirus ­impact on the global economy.

The Reserve Bank board, in its April meeting, kept the cash rate at a record low of 0.25 per cent, as ­expected, and revealed it had purchased $36bn of state and federal government bonds as part of a new policy to keep the yield on three-year bonds at 0.25 per cent.

“That extremely aggressive pace of purchases can’t be sustained for long,” said Marcel Thieliant at Capital Economics, noting the bank had bought 6.5 per cent of the outstanding stock of government bonds. “We expect the unemployment rate to surge to 12 per cent and underlying inflation to fall below 1 per cent over the next couple of years.”

The governor said the Reserve Bank wouldn’t lift the cash rate or alter its bond-buying until inflation was back in the 2 to 3 per cent target range and unemployment was near 4.5 per cent — what’s deemed the full employment level.

“What the bank had been noting for a while was that monetary policy is close to exhausted and that a fiscal response was necessary,” said Stephen Miller, an ­investment strategy consultant at GFMS.

“The enormous magnitude of the government’s fiscal response combined perhaps with a slightly diminished level of anxiety in ­financial markets has meant that the RBA hasn’t seen the need to flag extra ‘unorthodox’ measures.”

Dr Lowe pointed to “signs” that financial markets were “working more effectively than they were a few weeks ago”, which “partly reflects the substantial measures undertaken by central banks”.

The RBA’s balance sheet has risen to almost $280bn in recent weeks, up from $160bn in mid-January, as banks’ exchanges settlement balances soar in keeping with RBA purchases of their holdings of government bonds.